Zediva Streams New Releases Through Copyright Loophole

Zediva, a streaming movie service you’ve likely never heard of, is a most clever and useful middle finger to Hollywood — even if the site is careful to say it’s not about sticking it to the studios.

Zediva’s offering is quite simple: new release movies that you can’t get on Amazon, Netflix or iTunes that cost $2 for a digital rental that lasts for two full weeks. It hasn’t struck any deals with studios and doesn’t plan on doing so.

And the company says it’s perfectly legal for you to stream The Social Network or 127 Hours right now and are exiting their beta-test phase Wednesday morning.

So how do they get away with it?

Quite simply — the company literally rents you a DVD and a DVD player, with your computer, tablet or Google TV as the remote control. Unlike the other streaming movie services, Zediva doesn’t turn a movie into a file on its servers that it can serve to as many users as care to see it at once.

Instead, Zediva’s servers have DVD drives and actual DVDs. So when you rent a movie, that disc goes out of circulation until you release it back to the company, just like in one of those increasingly rare real-world video stores.

And like those video stores, Zediva doesn’t need to get permission from the studios to rent out discs, since once they buy the DVD they are free to rent it out or re-sell it, thanks to the first-sale doctrine in U.S. copyright law.

The company was founded about two years ago when founder and CEO Venky Srinivasan was traveling often and was frustrated that he had no way to watch new-release movies.

“It seems like a completely reasonable thing for people to do, and that’s how it started,” Venky Srinivasan said.

The company’s business plan is to fill in the gap that movie studios are enforcing on companies like Netflix: As a condition of getting streaming rights to movies, Netflix agrees not to even rent DVD copies of new releases for the first month after they go on sale.

So how does Zediva’s playback work?

Well, oddly, it’s both familiar and disconcerting. After you find a title that’s available to rent (some titles can be hard to get in the evening), the service launches in any browser that supports Flash. The company then tries to programmatically jump past the DVD’s promos, menus and FBI copyright warning, but the experience is both comical and frustrating, because you don’t have a real remote to try to get past the annoyances baked into every physical DVD (not that you can get past them even with your own DVD player).

After that however, the experience is mostly like watching a Netflix movie.

If your connection slows, Zediva will adjust the stream. If you pause the movie, you get a message telling you the disc will go back into the general pool in an hour, and a countdown timer appears on the screen.

If you decide to take a longer break, it’s not really a problem because Zediva gives you a full two weeks to watch and even re-watch a movie. But restarting from where you left off also shows off the clever hole that Zediva is exploiting. Getting back to your spot involves watching the DVD player skip chapter by chapter and then fast forwarding to the spot where you left off. If you had any doubt that Zediva was actually using a disk and not just ripping the movie on the sly, this throwback will show you that it’s a disk-based system.

Zediva’s got some other things going for it as well. Users can turn on the closed captioning in whatever language they like, a feature the company has found to be surprisingly popular.

And contrary to its initial hunch, the service isn’t just popular with young adults comfortable with watching movies on their MacBooks.

“People from all walks of life are watching,” said Vivek Gupta, the company’s co-founder and CTO. “One of the most interesting stories we heard was from a woman with an 85-year-old grandfather who turned out to be a big user of the service.”

The company was also surprised at how many people watch movies in four or five sittings, sometimes starting on a laptop, continuing on Google TV, and then finishing on an Android device, for instance.

As for the economics, it’s pretty straightforward. Buy a movie for about $25, rent it 13 times and you’ve basically broken even, even with bandwidth costs taken into account.

Zediva, a team of five based in Santa Clara, California, says it doesn’t expect legal trouble over its service. The team says they are planning to spend millions of dollars to buy DVDs and hope that studios see the company as a valuable customer, not a potential defendant in an expensive lawsuit.

Launching with about 100 titles, mostly Hollywood films, Zediva is offering two free streaming movies to any user who signs up before March 31. Those who like the service can pre-pay $10 for 10 rentals.

The company’s next steps are to create an HTML5-compatible streaming service so users can watch movies on the iPad and iPhone, and to integrate with internet-to-TV devices such as gaming consoles like the Wii and specialty equipment like Roku and Boxee.